For the benefit of those who like me have remained sceptical of the accounting gymnastics that have been employed over the years at our Council, I have endeavoured to establish communication with CFO Steve Baker. This has been in an effort to obtain a clear summary of precisely how reserves and ‘internal borrowing’ are handled. Steve has provided me with verbal information that provides the basis of this post.

This issue more than any other has given rise to suspicion and concern that there was a ‘shell game’ underway (‘now you see it; now you don’t!’), and that auditors, staff, councillors or everyone else involved were inadvertently or otherwise taking part in an ‘Emperors clothes’ delusion. Remember that much corporate history has been lost in the upheavals over the last four years, and it is important to record just what has taken place previously because tomorrow we begin a new financial year, with a newly adopted Annual Plan.

First and foremost - is the methodology in use fair and equitable for all ratepayers? We should perhaps start with the old Power Company shares that set our Council up financially back in the last century. These shares were allocated to existing power company customers (80%) and the Council (20%) of the total entitlement for the District. The Council’s shares were worth $24m, give or take. Several million dollars were withdrawn in the late 90’s for pet projects before it was ‘capped’. The ‘Reserve’ is now in the books as ‘equity’ of $23.9m, having acquired interest until 2009.

The fund was drained in 2007 as the result of a decision of the 2004/2007 Council to cover the additional costs incurred with the Eastern Seaboard waste-water plants that ended up costing well in excess of $90m – partially as a result of ‘improvements’ required through Environment Court appeals, and the failure of substantial budgeted Development Contributions to materialise with the onset of the economic downturn. These had been planned to cover 45% of the cost - laughable in reality!

The remaining costs were met through accumulated reserves, bank loans and increased rates – the latter virtually sealed the fate of the 2007/2010 Council because of rating ‘drag.’ I will not expand further here on the other reasons for the ‘blow-out’ - well and truly explored elsewhere. All that matters is that what was a nice little nest-egg and earner for previous councils suddenly disappeared from the cash-box, but not from the books where it is enigmatically recorded as ‘equity.’

But what about the interest on this ‘loan’, and depreciation on the wastewater-plants?

Remember that these plants are the ‘elephant in the kitchen’ of all TCDC capital works, and borrowing. Surely the interest on the $20m, and depreciation of the plants would return to the Power Share, or Depreciation Reserves accounts. Well no, not exactly, and here is the explanation:

Interestis charged on what has been designated in the past as ‘Internal Borrowing.’ Current councillors are very sensitive about the description because as Steve explains, it is not really a ‘loan’ if it is your own money – interest is simply taken from one hip pocket to the other in the same Council pants - get it? Hence the desire to call it anything but ‘internal borrowing’ as this gives rise to it being regarded as part of the overall Council borrowing – an anathema to councillors and staff alike because of the cumulative effect on Council borrowing limits.

So what happens to the interest? – It was recommended to the Finance and Revenue (or ‘Ways & Means’) Committee in 2009 that it consider the option of retaining this internal interest (always 1% less than the going Bank rate) by crediting the UAGC (the general rate that all ratepayers pay equally as part of their overall rates bill), meaning that every ratepayer would benefit equally, and it was quite substantial – about $50 per rating unit.

The Committee and the Council at the time were extremely conscious of the rate-payer reaction to the substantial rate increases that were the inevitable outcome of the waste-water plant blow-out, and with an election imminent members were quite anxious to find savings. It adopted the recommendation – futile at it turned out as only one Councillor survived following the inevitable rate hikes prior to the 2010 Election.

Rate-payers naturally found it difficult to connect the increases with the waste-water plant over-runs, just as Whitianga ratepayers currently puzzle over the rating effect of the Sports-Complex debacle. And it represented a change from previous practice where the interest went back to the Power Share Reserve as a cushion against inflation.

Offsetting it against the UAGC meant that Power Share Reserve has remained firmly fixed at $23.9m since, so that it is not now even inflation proofed.

So what about the depreciation that has been charged against the plants? The Auditor General finally agreed that our Council need not comply with IAS (International Accounting Standards) as it is required to do in respect of all its other activities. It was permitted to ignore depreciation on that proportion of the waste-water plants deemed ‘un-used’ due to the fact they had been egregiously overbuilt in accordance with the population growth rates provided by the University of Waikato Population Unit from 2003/6, before the down-turn.

Now you may have thought that it would be reasonable in the circumstances for at least that part of the depreciation attributable to the $20m ‘loan’ to be returned to the Power Share Reserve, or a separate but linked Depreciation Reserve, so that it could be built up and available at any time in the future when the replacement of those plants, or other major infrastructure may be required.

Well no, you would be wrong - the current state of the waste-water depreciation reserve is zero, nought – a great big capital O. And why? – Because the depreciation reserve is depleted as fast as it builds up. Other identifiable depreciation currently amounts to $5.9m, and $15.9m is expected to be transferred to the Reserve in the next financial year, which will immediately be used to pay down bank loans, and fund other projects. It will again end up at zero.

And is all this legal? – it appears so, because the Auditor General apparently has no concerns about our Council operating in this manner – 'normal procedure' it seems, and reflecting what is called ’light-handed’ oversight. This is precisely the reason for the position in which the Kaipara Council now finds itself. And guess what – that Council did not have a Power Share Reserve to fall back on when its waste-water build costs got out of control. Guess again what would have happened here if we had been in the same position?

Here, we have a ‘phantom’ Power Share Reserve that stands in our books as ‘equity’. Nothing goes in, and nothing comes out – it doesn’t exist other than as ‘equity’ – the money is gone! And here is the final rub – in spite of all the assurances provided to rate-payers by the current Council about the wonderful state of its finances, and the prudent oversight it has provided, backed up by a shonky newspaper survey, it remains to its shame that nothing has been done to correct this situation, and set about restoring reserves for the benefit of future generations.

There is only one explanation for this – the stated need to keep rates at an unjustifiable low level in accordance with campaign promises, and for future electoral purposes. And why? – Because they can! And they can borrow at will from the banks because of the famous McLean motion at the first meeting in 2011 that effectively raised borrowing limits by $50m.

The fact is that the Power Company shares were provided to the Council for the benefit of all current and future ratepayers. That they have benefitted only one section of the population through their perpetual commitment to the funding of the Eastern Seaboard waste-water schemes remain a perpetual disgrace that reflects ignorance or hubris, or both.

More than half of the ratepayers of this District have been left totally unable to obtain any benefit from the power company shares, and no amount of dissembling, or rationalisation can disguise this fact. I know from discussions that I have had with councillors who were on council at the time the original decisions were made that they had no idea this was the intended outcome.

The decision to make waste-water costs a ‘district’ charge in 2002 based on the ‘unaffordability’ rationale was an added insult that compounds the inequity of the situation. That this Council is currently considering making the costs of the multi-million dollar East Coast erosion control and restoration a further ‘district’ charge adds insult on insult on to West Coast rate-payers – suddenly, when it suits, Board ‘empowerment' is conveniently forgotten - presumably on the old ‘unaffordability’ rationale used when waste-water was deemed to be a ‘district’ responsibility.

This post is not aimed at exacerbating the age-old East/West division – Heaven help us! – What is proposed here is nothing more than a thorough and independent examination of these issues, and in particular, answers to the questions surrounding ‘internal borrowing,’ and the equity issues pertaining to the ‘perpetual’ nature of the waste-water funding.

Councillors will of course need to answer to ratepayers in due course on this, and the erosion related issues.

Reader Comments (1)

Might be the weather - not sure, but I have a funny feeling in my water that this Council is in financial trouble. Am willing to bet that Leach will not stand again as Mayor--- because the financial mess will be enormous and he will not have the financial nouse to get the Council out of it.All I can say is watch this space -- it will not be pretty.